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Paul addressed his reasons for staying in the Republican race, whether he would support Romney as nominee, how U.S. monetary policy is like the Roman Empire and why there should be legal competition to the U.S. dollar (yes, gold and silver).

Krugman, a Nobel Prize-winning economist, Princeton professor and New York Times columnist Krugman fired back on the role U.S. government should play in regulating the market economy, what the economist Milton Friedman really thought about government stimulus and what the right level of debt is for U.S. taxpayers.

Rep. Ron Paul on Professor Paul Krugman’s views:

"[Krugman] believes in big government, from what I read and hear, and I believe in very small government. I emphasize personal liberties. I don't like a managed economy, whether it's through central economic planning or monetary policy or even Congress doing it. It's a completely different philosophy that markets are supposed to work, you know, in a natural way.

“I want a natural rate of interest. I don't want the government or Federal Reserve fixing the rate of interest. That's price fixing […]. This idea that somebody or some group might know what the proper amount of money might be or what the proper rate of interest should be is sort of presumptuous. I don't know where they get this knowledge. […] When we talk about electing a president or a Congress to run the economy better, they're missing the whole point. Governments aren't supposed to run the economy. The people are."

Krugman's response to Paul:

"You can't leave the government out of monetary policy. If you think we're going to let it set itself, it doesn't happen. If you think you can avoid the government setting monetary policy, you're living in the world that was 150 years ago. We have an economy in which money is not just green pieces of paper with faces of dead presidents on them. Money is a part of the financial system that includes a variety of assets—we're not quite sure where the line between money and non-money is. It's a continuum.

“History tells us that in fact a completely unmanaged economy is subject to extreme volatility, subject to extreme downturns. I know this legend that some people like that the Great Depression was somehow caused by the government or the Federal Reserve, but that's not true. The reality is it was a market economy run amok, which happens repeatedly. […] I'm a believer in capitalism. I want the market economy to be left as free as it can be, but there are limits. You do need the government to step in to stabilize. Depressions are a bad thing for capitalism and it’s the role of the government to make sure they don't happen, or if they do happen, they don't last too long."

Paul on Krugman's idea that inflation is necessary to stimulate the economy:

"You're stealing value from people who save money. If you have a 2% or 10%, the value of the currency is lost. It really destroys an important feature of the economy, and that is savings. Savings tells us something—it tells us if capital is available. This notion that capital can come out of the expansion of money supply is remote.

"Professor Krugman indicates we just want to go back 100 years or so. That's not exactly true. We want to improve on what life was like back then. But he wants to go back 1,000 years or 2,000 years just as the Romans and the Greeks and all other countries debased their currency. They didn't have a computer. This idea that we need a Federal Reserve to run things or a central bank—that is just [out of touch with] modern times.

"What did the Romans do to their currency? The Byzantine Empire had a gold standard for a thousand years and they did quite well and they didn't fight wars. But the Roman empire eventually destroyed their currency. They put in wage and price controls before they diluted the metals. They inflated. They thought wealth could come by fooling the people. [...I]f they had 10 years to send their kid to college, would they put their money in gold coins or a Treasury bill making 1% or 2%? They can't keep up with the inflation or the devaluation of the currency."

Krugman's response:

"I'm not a defender of the economic policies of the Emperor Diocletian, let's make that clear.

"I'm a defender of the economic policies that we followed after World War II that produced the best generation of economic growth this country has experienced. We had a set of policies that provided mild inflation. There was effective government regulation of the financial system so it didn't go wild. […] We had fiscal policy that stimulated the economy when it was needed. We had policies that fostered a strong middle class instead of using the worship of the supposedly ideal force of the market. […] I like the America that my parents prospered in. I think we can restore a lot of that."

Paul's response:

"Just remember that Bernanke apologized to Friedman because the Federal Reserve was responsible for prolonging the agony of the depression. You have to liquidate the debt. After World War II, a lot of the debt was liquidated. But guess what else we did? Troops were coming home. Ten million people were coming home. Big-government liberals wanted to have job programs. They weren't put into place. We cut spending by some 60%, we slashed taxes. Finally, the Depression ended. So, it was that liquidation of debt that made it available that we could come back to work again."

Krugman's response:

"I want to say something about Milton Friedman here because if you actually read what he wrote in his writing for economists, as opposed to some of his loose popular writings, he actually said that the Federal Reserve was responsible for the Great Depression because it didn't do enough. Friedman's complaint was that the Federal Reserve did not print enough money. I know this. When Ben Bernanke was talking about the helicopter, he was taking that from Milton Friedman. That was really his idea. The state of the economic debate in America right now Milton Friedman would count on the far left of monetary policy."

Paul’s response to Krugman:

"The point is, the Fed does either too much or too little and they can't do it. They don't have a good record—they've ruined 98% of the value of the currency since 1913. That's dishonest—that steals value from people. Why should people get 1% for their money for savings and the banks get it for practically free? Why did the Federal Reserve bail out the rich and not give the money to the mortgage holders? If you care about poor people […], why didn't you use helicopters and pass it back to the home builders? That would be more fair."

Paul on what the role of the Fed should be:

"I'll tell you what we could do. Even with my book, it doesn't call for the end of the Fed because it would be chaotic if we ended the Fed. Too many people depend on it. All I want to do is get rid of the monopoly.

"I want to legalize competition. There's legal competition on currencies around the world, so why can't we allow ourselves here the legal competition over gold or silver standard? Why is the Fed so frightened of this? If I'm wrong, who cares? If I'm right -- if you want the paper money and I'm wrong, it doesn't hurt anybody. Just allow me to legalize the currency, get rid of the monopoly, take the taxes off gold and silver and get rid of the sales tax and capital gains tax—don't hide behind a monopoly. People today if they use gold and silver, you can go to jail."

Krugman's response:

"That's not my understanding of the law. But do you really think people use dollar bills because the federal government isn't allowing them to use other stuff? That seems like a very strange point of view. […] You can do barter with all kinds of stuff…The fact of the matter is, we actually have too much currency competition. This crisis was brought on by an expansion of what amounted to private money in the form of things like repo which were uncontrolled and turned into an enormous crisis when it collapsed."

Paul:

"If a private company commits fraud, they go to jail. If the Federal Reserve commits fraud, they get nothing. […] If you had a private issue of money and you committed a fraud, you would go to jail. But, no, governments can debase the currency and injure a lot of people and cause the business cycle and cause inflation and cause unemployment and get off scot-free."

Krugman:

"I have been pretty harsh on Ben Bernanke, but fraud is not one of the things I would charge him with."

Paul:

"You want him to print more money faster."

Krugman:

"Well, of course I do."

Professor Krugman on how much higher we could go with debt as a ratio of GDP:

"I don't have a fixed number. But if it takes another 30 points to get us out of this depression, I'm willing to accept that. I'm not going to claim there's no risk, but the risk of not doing what it takes to get out of a depression is a clear and present danger. I don't want us to go up to Japanese levels of debt, even though they turn out to be able to carry those levels of debt. But we're not anywhere close to a red line here, is the point. I can't give you a specific number.

"When John Maynard Keynes was writing, Britain had debt on the order of 130% GDP. That didn't stop fiscal stimulus from being the answer. Trying to reduce that number by slashing spending even now actually makes even the debt problem worse. If you are going to say—my proposal is to actually destroy the economy so we can't afford to carry the debt we already have, that's not a helpful policy."

Paul's response:

"[Krugman] ignores the fact that we did better after World War II when we did reduce the debt and the spending. But we don't know the precise date. It could be tomorrow or some other event because there is a subjective factor involved. We are sort of given a leeway because the world still trusts our dollar. So I sort of agree with him. But it just means a bigger bubble for our bonds and our dollar, so we don't know. But if this were true—if you believe that the world will continue to take our dollars no matter what our debt is, Americans shouldn't have to work anymore.

"We would just print all the money. The worst part about all this is the facilitation of debt. Because the Fed is the lender of resort—not only to their friends on Wall Street and all their banker friends, but also the politicians who get re-elected by running up these debts, and that the Fed always is there. They have to be there. So if you love big government and think it can last forever, I can understand why you love the Fed. But some of us believe in freedom and markets and sound market and no more wars."

Krugman's response:

"I believe in markets. I don't believe in using monetary policy to perpetrate depression."